Background

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The aim of this study is to provide the Members of the Parliament’s Fisheries Committee with a clear description of the corporate structure of the EU seafood industry (fishing, processing and the retail market). It provides a description of both the horizontal and vertical integration in the industry. The study, to the extent possible within the scope of the research, also explains the role of the third country operators and intermediaries.

Issues around vertical integration centre on what drives a firm to vertically integrate; why a firm will buy out one of its suppliers or customers or in some other way internalise the production of an intermediate good. In commercial fisheries there is one added dimension. The resource exploited – fish – is not always characterised by a private property rights structure. Rather, the fishing grounds are either common property or open access resources. A number of EU countries have instituted a form of private property rights management of their fisheries by using individual transferable quotas (ITQs) that assign the right to harvest a certain share of the total allowable catch (TAC) of a fishery to a harvester.

Like any private property, the ITQs are transferable. Therefore, if a harvester wishes to catch more fish than allowed by the quota he holds, he may purchase ITQs from another harveter. Harvesters might sell their quota for many reasons. Similarly, harvesters might come to temporary agreements, such as leasing or borrowing quotas.

The ITQs create a barrier to entry that does not exist in an open access or common property fishery. In a non-ITQ fishery, the processor wishing to gain monopoly control over the resource must not only buy out the majority of fishing vessels but must find a way to keep out new entrants. With ITQ management. the processor does not even need to buy the fishing vessels, but only needs to gain access to all of the available quota shares.

Other methods of controlling harvest in order to develop and maintrain sustainable fisheries include non-transferable quota, gear restrictions, and fishing season limitations. These have been used around the world. However, the ITQ system is gaining in prominence for a number of reasons, not least its inherent flexibility. As ITQs are proportions of TACs they can theoretically prevent overexploitation. Furthermore, as ITQs can be traded, leased and/or borrowed, fishermen can adjust their fishing strategies to focus on a particular species or fishing ground relevatively easily. ITQs can also assure a fishermen a source of income if he is termporarily unable to harvest due to mechanical or health issues.

This management strategy seems to be successful from a purely economic point of view. Fisheries worldwide have become more economically efficient after the implementation of quota programs. Efficiency occurs because the fishing fleet shrinks, allowing each boat a greater catch. The exit of traditional independent fishermen leads to an increase in either horizontal or vertical integration, or both.

Some fishermen, politicians, and others with an interest in fisheries are concerned by the increase in integration. The main concern is not based on economics but on equity and social justice. Fishing, like farming, has been a family tradition in many communities for hundreds of years. And while evidence suggests that integration can make fisheries more efficient, some find the potential gains in efficiency to be outweighed by social and other costs. These costs include the decline in independent fishermen and the disruption to coastal communities where many fishermen live, because of lost revenue and jobs.

This research is intended to document the evidence and provide an analysis of the current level of integration, both horizontal and vertical, at the EU level through a number of case studies.

Methodology

The research combined both quantitative and qualitative research methodologies. Due to the large number of stakeholders in the European Union’s fishing and fish processing industry, the most appropriate strategy to meet the research objective was to conduct a thorough analysis of horizontal and vertical integration in the sector using six selected case study countries. For each case study, an analysis of the company structures of the main fish catching companies was carried out in order to identify horizontal and vertical integration. Interviews were conducted with major fishing companies and producer organisations in the selected case study countries, as well as with representatives of the small-scale fishing sector.

Due to data restrictions, a simplified definition of horizontal integration is used for the quantitative analysis of the processes of integration. The adopted definition of horizontal integration rests on the theoretical framework that industry integration results in a decreased number of one-vessel enterprises and an increased number of vessels in multiple-vessel enterprises. Empirical models were developed to estimate the impact of integration on employment in the fish catching and fish processing industries, the correlation between employment fluctuations in the fish catching and fish processing industries, and the correlation between wages in both industries.

Definition of integration

Integration was found to take a number of different forms. This could generally be separated into two categories: structural and non- structural. Within these two categories integration could be either vertical or horizontal.

Structural vertical integration is defined as the process of investing in businesses further up or down the value chain. Structural horizontal integration could take two forms. The first form could be simply called expansion through the addition of new vessels to a fleet. The second form is the acquisition of or investment in peers. These peers could be members of the same Producers’ Organisation (PO), other POs domestically, or internationally.

There are a number of informal arrangements that can be considered as non-structural forms of integration to the extent that they are utilised in order to generate economic efficiencies by corporations. For example, firms may develop off-take agreements. These are agreements between a supplier and a buyer that the buyer will acquire a certain value of a commodity supplied by the supplier. This can be considered an example of non-structural vertical integration. An example of a form of non-structural horizontal integration is when fish catching companies choose not to buy or sell their quota, but rather borrow, rent or lease quota in order to either gain access to quotas or to generate capital to be used for other business activities.

Findings

This research has found that the levels and forms of both structural and non-structural vertical and horizontal integration vary between the different case study countries (see Table 1 for an overview).

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Conclusion

The quantitative analysis carried out in this study has indicated that if there is a 10% increase in structural horizontal integration or in the expansion of fleet size, there is a 0.001% decrease in employment. Therefore, the negative impact of horizontal integration on employment can be considered minimal. The study also found that fluctuations in employment in the fish catching segment do not directly correlate to fluctuations in employment in the fish processing segment. As is always the case with quantitative analysis, data limitations and the consideration of variables affect the findings. Nevertheless, the tests were robust. Further tests using different definitions of horizontal and vertical integration and using company level data could prove useful in future studies into the socioeconomic impacts of vertical and horizontal integration in the EU fisheries industry.

Regarding structural vertical and horizontal integration, it is difficult to determine general trends between the countries simply by looking at the companies themselves, the fisheries management system, the targeted species, historic factors, or the geographic location. External factors beyond the scope of this research, such as the business environment, rules and regulations, government policies, the economic condition of the country, and European economic conditions, play a significant role in describing the trends in both structural and nonstructural horizontal and vertical integration. Further research on other countries, as well as expanding the research to factor in the external factors that were beyond the scope of this research, is needed in order to develop more holistic policy recommendations at both national and EU levels. Nevertheless, this research has identified a number of trends in both structural and non-structural vertical and horizontal integration in the six case study countries.

The full implementation of the landings obligation is also likely to have a significant impact on the processes of integration. Respondents already indicated efforts to take this into consideration, including seeking access to more quotas in addition to developing more selective fishing techniques. This quota seeking integration in response to the landings obligation will likely include more structural horizontal integration domestically, where resources allow this. In cases such as Spain and Portugal, it is likely that structucal horizontal integration driven by the landings obligation will be in the form of international investments. Existing processes of non-structural horizontal integration will become more fully utilised. It is likely that tools such as the web-based tools developed in Denmark and Estonia will become more common place, and potentially an EU-wide tool will emerge.

Additionally, the Brexit will also have an impact on the processes of integration in EU fisheries. However, it is impossible to determine, as yet, what this could entail. Most particularly as it is not yet clear what the Brexit will mean for UK and EU fisheries management.

Recommendations

As stated above, the levels and forms of integration vary between the different case study countries. These differences relate in part to external factors beyond the scope of the study. Further differences relate to the fishing segment (e.g. demersal or pelagic), the targeted species, ease of access, cost, firm performance, and the fisheries management system. This study focused on six case study countries in order to draw general conclusions. One of the key conclusions is that there are significant differences between the case study countries.

It can therefore be expected that expanding this research to include more of the 23 EU member countries with a coastline will highlight yet further differences, as well as similarities. Furthermore, the strategic responses of fish catching and processing companies to the landings obligation and the Brexit have not yet been fully developed. Given this context, it is difficult to develop EU level policy measures that could mitigate the economic and social costs and optimise the benefits of integration in the industry, in particular for the coastal communities most concerned. This is more especially so as fisheries management and commercial and industrial policies in general are, to a large extent, determined at the national level.

Nevertheless, this research has developed the following recommendations:

Further research
Further research is needed on two fronts. Firstly, the inclusion of more case study countries would be informative as it would highlight further similarities and differences. Suggested additional countries include Germany, the Netherlands, Sweden, Italy, Latvia and Greece. These countries are suggested due to the relative importance of their fisheries sectors as well as their geographic location. If 12 of the 23 EU countries with a coastline were analysed in the same way as has been done in this current research, the results could be considered more open to generalisations.

Secondly, using a basic econometric model and limited data, this research found that integration did not have a significant impact on employment or wages in the fish catching and fish processing segments. This is potentially a positive finding for communities that rely to a large degree on fish catching and processing as their source of income. However, further econometric research is needed in order to confirm this. The econometric analysis would need to use a number of more complex definitions of integration. It would further need access to more detailed data, preferably at the community level. This would mean, for example, access to income, employment, and fiscal data at the community level of a large number of communities that are or were reliant on the fish catching and processing sectors. Such data would need to be available for at least the last 10-20 years.

Broader qualitative analyses and more robust econometric analyses will help to confirm the findings of this study.

EU level platforms
While, given the autonomy of the member states and the significant differences between them, it may be more difficult to address structural integration through EU level policy measures, the non-structural forms of integration lend themselves much better to targeting through EU level policy measures. In terms of non-structural horizontal integration, this research found that fish catching companies engaged in quota trade, quota swapping and quota renting. In terms of non-structural vertical integration, this research found that fish catching companies committed to off-take arrangements or, more commonly, sold their harvest at auction or in markets. This research therefore recommends a concrete measure to optimise, in particular for the coastal communities most concerned, the benefits of non-structural forms of integration in the industry: establishing two platforms at the EU level to facilitate these non-structural forms of integration.

Quota trading, renting, and swapping platform
One such platform would formalize non-structural horizontal integration. It would be accessible to fishermen throughout the EU. Initiatives are already in place in Denmark and Estonia; however, scaling this up to the EU level would allow more fish catching companies to benefit. Given the implementation of the landings obligation/discard ban, fish catching companies will increasingly seek to gain access to quotas, possibly outside of their quota portfolio. A transparent EU level platform will help them to flexibly, efficiently and effectively restructure their portfolios in order to maximise their income and minimise their losses.

EU level fish auction
Findings from the Danish fisheries suggest that fish auctions have a positive effect on increasing the benefits to fish catching companies. The Norges Sildesalgslag online auction is transparent, and guarantees a buyer. Norges Sildesalgslag staff are present at the landing sites to ensure that the volumes and qualities meet the deal requirements, and there is also insurance in case the processor is suddenly unable to pay for the transaction. The system avoids conflict between the vessels/skippers and processors. Scaling this up to the EU level would increase the benefits to fish catching companies throughout the EU, and would support the more common nonstructural form of vertical integration.

Quota concentration safeguards
Given the varying interests of EU member states and the different national-level fisheries management systems, it may not be plausible to develop quota concentration safeguards at the EU level. Indeed, it may not even be desirable. A certain number of large-scale international fishing companies can be considered desirable as they can drive technological development and economic efficiencies.

Nevertheless, quota concentration safeguards need to be developed, at least at the national level, in order to mitigate the economic and social cost and optimise the benefits of integration, in particular for the coastal communities most concerned. The findings from Denmark show that it is vital that quota safeguards be comprehensive and are able to anticipate the efforts of companies to find loopholes in the legislation. Evidence from the United Kingdom and France shows that POs can play an effective role in ensuring that rights to fish are kept in the local fishing communities. EU level policy measures to promote quota concentration safeguards can be developed, while the integration of these safeguards into the national level fisheries management systems should remain the responsibility of the Member States. Such a strategy would remain within the spirit of the Common Fisheries Policy.

Figure 2 provides an overview of the product segmentation of the European fish and seafood market by revenue in 2015 (Infinity Research, 2015a, p.19-21). The European prepared fish and seafood market was estimated to be worth approximately US$ 32 billion in 2015 (ibid.). The frozen fish and seafood market segment was estimated at approximately US$ 27, and the fresh and chilled fish and seafood segment was estimated to be worth approximately US$ 15 (ibid.).

Figure 3 provides an overview of the main distribution channels for fish and seafood products in the European market. The ‘Others’ distribution channel category consists of independent retailers, open markets and online retailers.

Investment Company Henning Kjeldsen Holding is the parent company of Gitte Henning. Entrepreneur Henning Kjeldsen is the full owner of the investment company. Gitte Henning has two subsidiaries: Thyborøn Trawlbinderi is also engaged in fish catching, while the Thyborøn Trawlbinderi Hv. Sande department produces rope, netting, and twine used in fishing.

Figure 5 provides an overview of the Rederiet Ruth company structure. The company has two owners who invest in the company through investment holding companies. The owners are Gullak Arngrimsson Madsen and Ole Nattestad. Gullak Arngrimsson Madsen’s investment vehicle is also engaged in real estate. Ole Nattestad’s investment vehicle does not report any other investments.

Figure 36 shows that slightly less than half of the fishermen are located in England and 40% in Scotland (Scientific, Technical and Economic Committee for Fisheries, 2015).

More than 60% of all landings by UK vessels were harvested in the Northern North Sea or West of Scotland.

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